Pair trading system and method

ABSTRACT

A method is provided for fulfilling a pair trade request and includes the steps of receiving a plurality of pair trade requests; executing a transaction for a first portion of one of the plurality of pair trade requests and matching a second portion of the one of the plurality of pair trade requests against another of the plurality of pair trade requests.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a divisional application of U.S. patent applicationSer. No. 10/206,549, entitled “Pair trading system and method”, whichwas filed on Jul. 25, 2002, which claims priority to U.S. provisionalpatent application Ser. No. 60/334,163 entitled “Method and System forTrading Pairs of Securities” that was filed on Nov. 29, 2001. Thecontents of both applications are herein incorporated by reference.

BACKGROUND

The following invention relates to a system and method for tradingsecurities and, in particular, for a system and method of tradingsecurities in pairs.

A recognized strategy for trading securities is known as pair-trading.Pair-trading is a non-directional investment strategy in which theinvestor identifies two securities having similar characteristics andthe securities are currently trading at a price relationship that is outof their historical trading range. The investor exploits the pricerelationship between the securities by buying the undervalued securitywhile short-selling the overvalued security. Because pair-trading is amarket-neutral strategy, it is a particularly desirable strategy forinvesting in volatile markets.

One context in which pair trading is useful is where an investor desiresto take advantage of an arbitrage opportunity resulting from a mergerbetween two companies. For example, Company A has announced a definitiveagreement to acquire Company T in which case Company T shareholders willreceive 0.5 shares of Company A stock for each share of Company T stockthey own. The investor desires to capture the “spread” between theoffered consideration (0.5 shares of A) and the price of T stock. To dothis, the investor buys shares in T stock and sells shares of A stock.

For instance, if stock T is trading at $28 per share and stock A istrading at $60 per share, then the investor may execute a trade for200,000 spreads by buying 200,000 shares of T stock and selling 100,000shares of A stock. After the merger takes place, the investor will coverthe short position in stock A with the 100,000 shares of A stock theinvestors receives in exchange of the 200,000 shares the investor heldof stock T. Thus, by executing the pair trade, the investor locks in a$400,000 profit (assuming that the merger goes through). The process ofexecuting a pair trade thus includes executing individual tradesdirected to each leg of the pair trade request. An example of a systemfor executing trades for filling a pair trade request is the Quantexsystem from ITG (http://www.itginc.com/products/quantex/quantex.html) of380 Madison Avenue, New York, N.Y. 10017.

A challenge in implementing a pair trade is to find a counterparty for aparticular position an investor desires to establish while minimizing“leg risk.” Typically, a large pair trade is performed “off the market”as a private transaction negotiated by a financial institution thatservices large clients. For example, if an investor desires to execute apair trade betting that a proposed merger between two companies will gothrough, the investor would approach a financial institution seeking aninvestor that is willing to bet against the merger. The financialinstitution then acts as an intermediary between the two investors inwhich the investors establish equal and opposite positions in the stockof the proposed merger partners thereby completing the pair trade. Thusby matching two pair trade requests so that the transactions associatedwith each of the pair trade legs are executed simultaneously, neitherinvestor is exposed to leg risk that would otherwise result for theperiod of time between execution of the first leg and the second leg ofthe pair trade.

There are numerous drawbacks associated with the prevalent pair-tradingpractice. First, pair-trading is typically limited to clients of largefinancial institutions that have the ability to identify suitablecounterparties for a particular pair trade. This is especially the casewhen the pair trade involves a large amount of stock or illiquid stocksin which the only way to execute the trade and minimize leg risk is viaan “off the market” transaction negotiated by a financial institution.Also, because a pair-trade is typically negotiated by the parties with afinancial institution as an intermediary, the process is often slow andinefficient. Furthermore, pair-trading under current practice isgenerally best suited for large clients seeking to establish largepositions thereby providing the financial institutions with the economicincentive to execute the transaction. Smaller clients, however, mustrely on the markets for executing pair trades, which is unsuitable forilliquid stocks and also results in increased leg risk.

Accordingly, it is desirable to provide a system and method for tradingsecurities in pairs.

SUMMARY OF THE INVENTION

The present invention is directed to overcoming the drawbacks of theprior art pair trading practices. Under the present invention a methodis provided for fulfilling a pair trade request and includes the stepsof receiving a plurality of pair trade requests; executing a transactionfor a first portion of one of the plurality of pair trade requests andmatching a second portion of the one of the plurality of pair traderequests against another of the plurality of pair trade requests.

In an exemplary embodiment, the method includes the step of executing atransaction for a first portion of one of the plurality of pair traderequests in an external market.

In another exemplary embodiment, the method includes the step ofexecuting a transaction for a first portion of one of the plurality ofpair trade requests against the order inventory.

In yet another exemplary embodiment, the pair trade request includes afirst security having a bid price and an ask price and a second securityhaving a bid price and an ask price, and the method includes the stepsof determining whether the bid price of the first security and the bidprice of the second security meet a spread limit; determining an amountof the second security that can be sold based on a bid size associatedwith the second security; calculating an equivalent amount of the firstsecurity that can be bought based on the amount of the second securitythat can be sold; adjusting the equivalent amount of the first securitybased on adjustment criteria; calculating a purchase price for theadjusted equivalent amount of the first security based on the spreadlimit; executing an initiating order to buy the adjusted equivalentamount of the first security at the purchase price and executing acovering order to sell the amount of the second security.

In still yet another exemplary embodiment, the method includes the stepof executing a covering order to sell the amount of the second securityat the bid price of the second security.

In an exemplary embodiment, the method includes the steps of determiningwhether the ask price of the first security and the ask price of thesecond security and/or the bid price of the first security and the bidprice of the second security meet a spread limit; determining an amountof the first security that can be bought based on an offer sizeassociated with the first security; calculating an equivalent amount ofthe second security that can be sold based on the amount of the secondsecurity that can be bought; adjusting the equivalent amount of thesecond security based on adjustment criteria; calculating a sellingprice for the adjusted equivalent amount of the second security based onthe spread limit; executing an initiating order to sell the adjustedequivalent amount of the second security at the selling price andexecuting a covering order to purchase the amount of the first security.

In another exemplary embodiment, the method includes the step ofexecuting a covering order to purchase the amount of the first securityat the ask price of the first security.

In yet another exemplary embodiment, the adjustment criteria include aminimum amount and a maximum amount.

In still yet another exemplary embodiment, the method includes the stepof rounding the initiating order to a round lot size.

In an exemplary embodiment, the method includes the step of executing afirst portion of one of the plurality of pair trade requests in aplurality of tranches.

In another exemplary embodiment, the one of the plurality of pair traderequests and the another of the plurality of pair trade requests includea first security and a second security, the one of the plurality of pairtrade requests has a first spread limit and the another of saidplurality of trade requests has a second spread limit and wherein themethod includes the steps of determining that a range of the firstspread limit and the second spread limit overlaps with a market spread;setting a spread level; calculating prices for the first security andthe second security that are within the market spread and based on thespread level and matching the second portion of the one of the pluralityof pair trade requests against another of the plurality of pair traderequests based on the calculated prices.

In yet another exemplary embodiment, the method includes the steps ofcalculating a mean between the first spread limit and the second spreadlimit and setting the spread level as the mean if the mean is within themarket spread.

In still yet another exemplary embodiment, the method includes the stepof identifying a spread amount that is closest to the mean and withinthe market spread and setting the spread level as the spread amount ifthe mean is not within the market spread.

In an exemplary embodiment, the one of the plurality of pair traderequests and the another of the plurality of pair trade requests includea first security and a second security, the one of the plurality of pairtrade requests has a first spread limit, a buy ratio and a sell ratio,the another of the plurality of trade requests has a second spreadlimit, a buy ratio and a sell ratio and the method includes the steps ofdetermining that the buy ratio and the sell ratio associated with theone of the plurality of trade requests does not equal the buy ratio andthe sell ratio of the another of the plurality of trade requests andthat an overlap exists between range of the first spread limit and thesecond spread limit and a market spread; determining that market pricesexist that are within the overlap; determining a mismatch amount in thesecond security based on a difference between the buy ratio and the sellratio associated with the one of the plurality of trade requests and thebuy ratio and the sell ratio of the another of the plurality of traderequests; calculating a cross amount for the first security and thesecond security; selecting a crossing price for the first security andthe second security that is within the overlap; determining that themismatch amount is available at the crossing price for the secondsecurity; matching the second portion of the one of the plurality ofpair trade requests against another of the plurality of pair traderequests based on the calculated prices and executing a transaction forthe mismatch amount of the second security at the crossing price for thesecond security.

In another exemplary embodiment, the method includes the step ofdetermining that the mismatch amount is available in an external marketat the crossing price for the second security.

In yet another exemplary embodiment, the method is performed by afinancial institution having order inventory and includes the step ofdetermining that the mismatch amount is available in the order inventoryat the crossing price for the second security.

In still yet another exemplary embodiment, the one of the plurality ofpair trade requests and the another of the plurality of pair traderequests indicate a number of spreads and the method includes the stepof matching a second portion of the one of the plurality of pair traderequests against another of the plurality of pair trade requests if thenumber of spreads is greater than a minimum number of spreads.

In an exemplary embodiment, the method includes the step of receiving apreference for filling at least some of the plurality of trade requestsvia the step of executing a transaction for a first portion of one ofthe plurality of pair trade requests, described above.

In another exemplary embodiment, the method includes the step ofreceiving a preference for filling at least some of the plurality oftrade requests via the step of matching a second portion of the one ofthe plurality of pair trade requests against another of the plurality ofpair trade requests, described above.

Under the present invention, a method for fulfilling a pair traderequest is provided and includes the steps of receiving a plurality ofpair trade requests and matching at least a portion of one of theplurality of pair trade requests against another of the plurality ofpair trade requests.

Under the present invention, a system for fulfilling a pair traderequest is provided, the system receiving a plurality of pair traderequests and includes a pair trading engine for executing a transactionfor a first portion of one of the plurality of pair trade requests. Thesystem also includes a pair crossing network for matching a secondportion of said one of the plurality of pair trade requests againstanother of the plurality of pair trade requests.

In an exemplary embodiment, the system includes a link to externalmarkets and wherein the pair trading engine executes the transaction forthe first portion of one of the plurality of pair trade requests in theexternal markets.

In another exemplary embodiment, the system includes a financialinstitution having an order inventory and wherein the pair tradingengine executes the transaction for the first portion of one of theplurality of pair trade requests against the order inventory.

In yet another exemplary embodiment, the pair trade request includes afirst security having a bid price and an ask price and a second securityhaving a bid price and an ask price, and wherein the pair trading enginedetermines whether the bid price of the first security and the bid priceof the second security meet a spread limit; determines an amount of thesecond security that can be sold based on a bid size associated with thesecond security; calculates an equivalent amount of the first securitythat can be bought based on the amount of the second security that canbe sold; adjusts the equivalent amount of the first security based onadjustment criteria; calculates a purchase price for the adjustedequivalent amount of the first security based on the spread limit;executes an initiating order to buy said adjusted equivalent amount ofthe first security at the purchase price and executes a covering orderto sell the amount of the second security.

In still yet another exemplary embodiment, the pair trading engineexecutes a covering order to sell the amount of the second security atthe bid price of the second security.

In an exemplary embodiment, the pair trading engine determines whetherthe ask price of the first security and the ask price of the secondsecurity meet a spread limit; determines an amount of the first securitythat can be bought based on an offer size associated with the firstsecurity; calculates an equivalent amount of the second security thatcan be sold based on the amount of the second security that can bebought; adjusts said equivalent amount of the second security based onadjustment criteria; calculates a selling price for the adjustedequivalent amount of the second security based on the spread limit;executes an initiating order to sell the adjusted equivalent amount ofthe second security at the selling price; and executes a covering orderto purchase the amount of the first security.

In another exemplary embodiment, the pair trading engine executes acovering order to purchase the amount of the first security at the askprice of the first security.

In yet another exemplary embodiment, the pair trading engine rounds theinitiating order to a round lot size.

In still yet another exemplary embodiment, the pair trading engineexecutes a first portion of one of the plurality of pair trade requestsin a plurality of tranches.

In an exemplary embodiment, the one of the plurality of pair traderequests and the another of the plurality of pair trade requests includea first security and a second security, the one of the plurality of pairtrade requests has a first spread limit and the another of the pluralityof trade requests has a second spread limit and wherein the paircrossing network determines that a range of the first spread limit andthe second spread limit overlaps with a market spread; sets a spreadlevel; calculates prices for the first security and the second securitythat are within the market spread and based on the spread level; andmatches the second portion of said one of the plurality of pair traderequests against another of the plurality of pair trade requests basedon the calculated prices.

In another exemplary embodiment, the pair crossing network calculates amean between the first spread limit and the second spread limit and setsthe spread level as the mean if the mean is within the market spread.

In yet another exemplary embodiment, the pair crossing networkidentifies a spread amount that is closest to the mean and within themarket spread and sets the spread level as the spread amount if the meanis not within the market spread.

In still yet another exemplary embodiment, the one of said plurality ofpair trade requests and the another of the plurality of pair traderequests include a first security and a second security, the one of theplurality of pair trade requests has a first spread limit, a buy ratioand a sell ratio, the another of the plurality of trade requests has asecond spread limit, a buy ratio and a sell ratio and wherein the paircrossing network determines that the buy ratio and the sell ratioassociated with the one of the plurality of trade requests does notequal the buy ratio and the sell ratio of the another of the pluralityof trade requests and that an overlap exists between range of the firstspread limit and the second spread limit and a market spread; determinesthat market prices exist that are within the overlap; determines amismatch amount in the second security based on a difference between thebuy ratio and the sell ratio associated with the one of the plurality oftrade requests and the buy ratio and the sell ratio of the another ofthe plurality of trade requests; calculates a cross amount for the firstsecurity and the second security; selects a crossing price for the firstsecurity and the second security that is within said overlap; determinesthat the mismatch amount is available at the crossing price for thesecond security; matches the second portion of the one of the pluralityof pair trade requests against another of the plurality of pair traderequests based on the calculated prices; and executes a transaction forthe mismatch amount of the second security at the crossing price for thesecond security.

In an exemplary embodiment, the pair crossing network determines thatthe mismatch amount is available in an external market at the crossingprice for the second security.

In another exemplary embodiment, the pair crossing network determinesthat the mismatch amount is available in the order inventory at thecrossing price for the second security.

In yet another exemplary embodiment, the one of said plurality of pairtrade requests and the another of the plurality of pair trade requestsindicate a number of spreads and wherein the pair crossing networkmatches a second portion of the one of the plurality of pair traderequests against another of the plurality of pair trade requests if thenumber of spreads is greater than a minimum number of spreads.

In still yet another exemplary embodiment, the plurality of pair traderequests include at least some pair trade requests indicating apreference for execution via said pair crossing network, and the systemfurther includes a portfolio manager in communications with the paircrossing network, the portfolio manager receiving the plurality of pairtrade requests and routing the at least some pair trade requests to thepair crossing network according to the preference.

In an exemplary embodiment, the system includes a pair trading enginefor executing at least some of the plurality of pair trade requests,further includes a portfolio manager in communications with the pairtrading engine and wherein the plurality of pair trade requests includeat least some pair trade requests indicating a preference for executionvia the pair trading engine, the portfolio manager receiving theplurality of pair trade requests and routing the at least some of theplurality of trade requests to the pair trading engine according to thepreference.

Under the present invention, a system for fulfilling a pair traderequest is provided, wherein the system receives a plurality of pairtrade requests and includes a pair crossing network for matching atleast one of the plurality of pair trade requests against another of theplurality of pair trade requests.

Accordingly, a method and a system are provided for trading pairsecurities.

The invention accordingly comprises the features of construction,combination of elements and arrangement of parts that will beexemplified in the following detailed disclosure, and the scope of theinvention will be indicated in the claims. Other features and advantagesof the invention will be apparent from the description, the drawings andthe claims.

DESCRIPTION OF THE DRAWINGS

For a fuller understanding of the invention, reference is made to thefollowing description taken in conjunction with the accompanyingdrawings, in which:

FIG. 1 is a block diagram of a system for trading securities in pairsaccording to the present invention;

FIG. 2 is a flowchart of the steps a pair trading engine included in thesystem of FIG. 1 applies to fill a pair trade request;

FIG. 3 is a flowchart of the steps a pair crossing network included inthe system of FIG. 1 applies to fill a pair trade request;

FIG. 4 is a flowchart of a process by which the pair crossing network ofthe system of FIG. 1 fills imperfectly matched orders; and

FIG. 5 is a graph for identifying the market prices for two securitiesthat meet the required spread limits.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS

Referring now to FIG. 1, there is shown a block diagram of a system 1for trading securities in pairs according to the present invention.System 1 receives pair trade requests from clients operating clientaccess devices 7 and attempts to fill the pair trade requests accordingto the parameters associated with the particular pair trade request.System 1 includes two different subsystems for filling pair traderequests: a pair trading engine 3 and a pair crossing network 5. As willbe described below, pair trading engine 3 receives a pair trade requestand attempts to fill (in whole or in part) the trade request byexecuting the appropriate trades in an external market 13 (that mayinclude, by way of non-limiting example, the New York Stock Exchange,the NASDAQ or any other financial market). Pair trading engine 3 mayalso fill (in whole or in part) a pair trade request by executing atransaction against order inventory 11 of (non-pair) trade requestscontrolled by the financial institution that is operating system 1. Inaddition, pair trading engine may also fill (in whole or in part) a pairtrade request by forwarding the trade request to pair crossing network 5for matching with other pair trade requests.

Likewise, pair crossing network 5 receives a pair trade request andfulfills (in whole or in part) the request by matching it againstanother pair trade request received by pair crossing network 5, bymatching the request against inventory 11 controlled by the financialinstitution and/or by forwarding the trade request to pair tradingengine 3 for execution in external markets 13.

System 1 also includes a portfolio manager 9 (that may be, for example,a software program executing on a computer system) that receives thepair trade requests from client access device 7 and presents the traderequest to either pair trading engine 3, pair crossing network 5 orboth, depending on the trade parameters set by the client. Also, theclient may query portfolio manager 9 regarding the status of any pairtrade request the client has presented to system 1.

In operation, system 1 may fulfill a pair trade request either usingpair trading engine 3, or pair crossing network 5, or a combination ofthe two. For example, a pair trade request received by system 1 may becompletely filled by pair trading engine 3 as follows.

Assume a case where XYZ is taking over ABC and is offering 0.575 sharesof XYZ for each ABC share and investor Arb wants to invest in the pricedifference between ABC stock and XYZ stock. To take advantage of theprice difference, Arb wants to lock in the difference between the valueoffered (0.575*XYZ stock) and the value of ABC stock by buying ABC stockand selling XYZ stock subject to the condition that ABC−0.575XYZ<=−$1.19 (i.e., Arb desires to capture a $1.19 difference betweenXYZ's takeover offer and ABC's share price).

In order to fill this pair trade, Arb presents a pair trade request toportfolio manager 9 (using client access device 7). The pair traderequest typically includes a number of parameters that define the pairtrade and that also may be used by portfolio manager 9 in determininghow the pair trade request is to be filled. Arb typically indicates inthe trade request the number of spreads the Arb desires to invest in andalso provides a minimum and maximum share amount that he is willing totrade per tranche.

For example, Arb may indicate a desire to invest in 100,000 spreads andmay only wish to trade the spread 3,000-8,000 shares at a time. Arbgenerally sets this tranche size range based on the liquidity andvolatility of ABC stock and XYZ stock. Arb may set a larger minimumtranche size if ABC stock and XYZ stock are fairly liquid stocks becausehigher liquidity increases the likelihood that a larger tranche sizewill be executed. Arb may set a lower maximum tranche size if XYZ stockand ABC stock are volatile stocks so as to limit the “leg risk”associated with executing a pair trade.

Yet another pair trade parameter Arb provides is the spread limit (inthe above case −1.19) which is the amount Arb desires to capture in thetrade. Arb does not have to provide, however, the discrete prices atwhich trades for ABC and XYZ stock are to be executed as these pricesare calculated by pair trading engine 3 (and/or pair crossing network5), as will be described below.

Referring now to FIG. 2, there is shown a flowchart describing the stepspair trading engine 3 applies to fill a pair trade request. Theflowchart in FIG. 2 is based on the above example and the market datalisted in Table 1 below.

TABLE 1 Ratio Bid Size Bid Price Ask Price Ask Size ABC: 1 7,500 6969.3125 1,500 XYZ: 0.575 10,000 122.50 122.625 200 XYZ 70.4375 70.5094Ratio-Adjusted Value Dollar Spread Bid:Bid Ask:Ask −1.4375 −1.1969

Initially, in Step 201, pair trading engine 3 determines whether thebid/bid prices or ask/ask prices of ABC and XYZ stock, respectively,meet the spread limit requirement of the particular pair trade request.In this case the bid/bid spread is −1.4375 ((122.50*0.575)−69) and theask/ask spread is −1.1969 ((122.625*0.575)−69.3125) so that each spreadis less than the spread limit of −1.19, as is required for thisparticular trade. Once it is determined that either the bid/bid spreador the ask/ask spread meets the spread limit, then in Step 202, it isdetermined (as is indicated in Table 1) how much XYZ stock can be soldat the bid and how much ABC stock can be bought at the ask. In anexemplary embodiment, the client may specify whether the bid/bid spread,the ask/ask spread or either the bid/bid or the ask/ask spread mustexceed the indicated spread limit for a transaction to proceed. Ifneither the bid/bid spread nor the ask/ask spread meets the spreadlimit, the process waits a period of time (for example 0.10 seconds) andreturns to Step 201 to again test whether the bid/bid spread or theask/ask spread meets the spread limit.

Next, in step 203, an equivalent amount of stock that can be sent intothe market (i.e., bought/sold in the market) is calculated for a spreadbased on the bid/bid price spread and/or the ask/ask price spread thatmeets the spread limit. In this example, if a maximum of 10,000 sharesof XYZ stock can be sold into the market (i.e., the XYZ bid size) then,based on the ABC:XYZ ratio (of 1:0.575 in this case), a total of 17,391(10,000/0.575) shares of ABC stock are to be bought in order to executea balanced pair trade. Likewise, if a maximum of 1,500 shares of ABCstock can be bought in the market (i.e., the ABC ask size), then, basedon the ABC:XYZ ratio (of 1:0.575 in this case), a total of 863(1500×0.575) shares of XYZ stock are to be sold in order to execute abalanced pair trade.

Next, in Step 204, the pair trade share amounts calculated in Step 203are adjusted to conform to the wave maximum and minimum parameters(i.e., the maximum/minimum tranche size) included in the pair traderequest as well as market round lot limits. In the above example, theamount of ABC shares to be bought that was calculated based on the XYZbid size (i.e., 17,391) is first rounded to an even lot size (i.e.,17,400) and then reduced to the maximum tranche size of 8000. Also, theamount of XYZ shares to be offered that was calculated based on the ABCask size (i.e., 863) is first rounded to an even lot size (i.e., 900)and then increased to 1,700 shares to meet the minimum tranche size of3000 (3000×0.575=1777). In an exemplary embodiment the minimum andmaximum tranche size is scaled by the particular ratio (for example, inthe above case, the tranche sizes for XYZ stock is scaled by 0.575). Inanother embodiment, the maximum/minimum tranche size is used for eachsecurity in the pair trade request without scaling. In yet anotherexemplary embodiment, the pair trade request includes a separatemaximum/minimum tranche for each security.

Once the share amounts for the pair trade are calculated, in Step 205,the share prices that are needed to meet the spread limit of the pairtrade request are calculated. For example, for a pair trade based on thebid/bid price spread, in order to meet the spread limit of $1.19 credit,the price at which ABC stock is to be bid should be no greater than$69.2475 ((122.50×0.575)−1.19) a share. Likewise, for a pair trade basedon the ask/ask price spread, in order to meet the spread limit, theprice at which XYZ stock is to be offered should be greater than orequal to $122.6130 ((69.3125+1.19)/0.575) a share.

Next, once the pair trade share amounts and share prices have beencalculated, in Step 206, pair trading engine 3 sends “initiating” ordersto external markets 13 in order to fill the pair trade request. Theinitiating orders may include an initiating order for executing a pairtrade based on the bid/bid spread (in this case a bid for 8,000 sharesof ABC stock at $69.2475) and/or an initiating order for executing apair trade based on the ask/ask spread (in this case an offer of 1,700shares of XYZ stock at $122.6130).

Finally, as the initiating orders sent to external markets 13 in Step207 get filled, pair trading engine 3 automatically sends into themarket the covering side of the pair trade. So, for example, as theinitiating order of buying 8,000 shares of ABC stock at $69.2475 getsfilled, pair trading engine 3 sends an order to external markets 13 tosell 4,600 (8,000×0.575) shares of XYZ stock at $122.50.

In an exemplary embodiment, the client's pair trade request includesthreshold amounts that indicate the amount of variance in stock priceand/or share amount the client is willing to absorb. For example, if inthe process of covering the initiating order the price of XYZ stock dipsto $122.49 (in which case the spread limit of the pair trade would dropto 1.18), then pair trading engine 3 would still sell XYZ stock at theprice of $122.49 if the $0.01 difference was within the threshold amountincluded in the pair trade request. Similarly, the pair trade requestmay include threshold amounts for any other pair trade parameter,including by way of non-limiting example, the number of spreads to bepurchased and the tranche sizes. If, however, a particular thresholdamount indicated by the client is exceeded for any given pair tradeparameter, then pair trading engine 3 would attempt to cancel theinitiating order and/or the covering order (that may be possible if theorders have not yet reached the market or have not yet been filled). Insuch a case, pair trading engine 3 would then repeat the above analysisfor determining suitable initiating and cover orders.

To fill a pair trade request, pair trading engine 3 executes tradesutilizing the method described above. Typically, pair trading engine 3tranches a pair trade request and trades piece-meal in external markets13. In certain cases, however, it may be difficult to fill a traderequest by executing several transactions in external markets 13 eitherbecause the pair trade request is for a very large number of spreads orincludes stocks that are illiquid (in which cases pair trading engine 3may be ineffective in filling the pair trade request). Also, in certainsituations, a client wishing to remain anonymous may indicate in thepair trade request a preference that no orders be sent to externalmarkets 13. In these circumstances, portfolio manager 9 may route theparticular pair trade request to pair crossing network 5.

Referring now to FIG. 3, there is shown a flowchart illustrating thesteps pair crossing network 5 applies to fill a pair trade request. Theflowchart in FIG. 3 is based on the above example and the market datalisted in Table 2 below.

TABLE 2 Spread Investor Action Ticker Ratio Shares Action 2 Ticker RatioShares Limit* Arb Buy ABC 1 50,000 Sell XYZ 0.575 28,800 1.19 creditAntiarb Sell ABC 1 30,000 Buy XYZ 0.575 17,200 1.30 debit *Spread Limitas defined by [0.575 XYZ − ABC]

Continuing the previous example, assume the pair trade request issued byArb for 100,000 spreads was half-filled by pair trading engine 3. Also,assume that system 1 receives a pair trade request from Antiarb thatindicates a desire to sell 30,000 shares of ABC and buy 17,200 shares (aratio of 1:0.575) and also indicates a spread limit of 1.30 (i.e.,(ABC−0.575XYZ)<=$1.30). In this case Arb and Antiarb's orders arecomplimentary in the primary order elements—securities, ratios and buyversus sell. Also, Antiarb is willing to pay $0.11 per spread more thanArb is demanding from the marketplace. Based on these parameters, thereis an opportunity for Arb's and Antiarb's trade requests to be filledvia pair crossing network 5.

If Antiarb's pair trade request was marked for trading by pair tradingengine 3, then portfolio manager 9 sends Antiarb's order to pair tradingengine 3 for execution. Pair trading engine 3 then sends the parametersof Antiarb's trade request, as well as all orders waiting for executionin pair trading engine 3, to pair crossing network 5. Pair crossingnetwork 5 will recognize (as described above) that there is a crossingopportunity between Arb's order and Antiarb's order. In this case, paircrossing network 5 then directs pair trading engine 3 to suspend theexecution of Antiarb's order in the amount that can be crossed by paircrossing network 5 (30,000 spreads in this case). In addition, pairtrading engine 3 routes a cross amount of 30,000 spreads from Arb'sorder to pair crossing network 5 for crossing against Antiarb's order.At this point, the pair crossing network 5 crosses the Antiarb orderagainst a portion of Arb's order, as follows.

Assume the prevailing market conditions at the time of the cross are asshown in Table 3. Furthermore, Table 3 indicates the XYZ Ratio-AdjustedValue for both the bid and ask prices based on the conversion ratio of1:0.575. Based on the XYZ Ratio-Adjusted Values, a Bid:Ask Spread Range(i.e., the spread provided for a cross between the bid price of ABCstock and the XYZ Ratio-Adjusted ask price) of −1.3863 is calculated andan Ask:Bid Spread Range (i.e., the spread provided for a cross betweenthe ask price of ABC stock and the XYZ Ratio-Adjusted bid price) of−1.05 is calculated.

TABLE 3 Ratio Bid Size Bid Price Ask Price Ask Size ABC: 1 5,000 7070.25 3,500 XYZ: 0.575 6,500 124 124.15 3,000 XYZ 71.30 71.3863Ratio-Adjusted Value Spread Range Bid:Ask Ask:Bid −1.3863 −1.05

To perform the cross, in Step 301 pair crossing network 5 firstdetermines whether the range of spread limits associated with Arb's andAntiarb's trade requests (i.e., $1.30-$1.19) coincides with the range ofthe prevailing market spread ($1.3863-$1.05). In this example, the rangeof spread limits does coincide with the prevailing market spread becauseat least a portion of the spread limit range overlaps with a portion ofthe market spread. Thus, a cross can occur.

Next, in Step 302, pair crossing network 5 calculates the mean of Arb'sand Antiarb's spread order limit which is ($1.30+$1.19)/2=$1.245 anddetermines whether the mean is within the range of the market spread(i.e., $1.3863-$1.05). If it is, then in Step 303, pair crossing network5 calculates the prices at which to cross. The prices must be within thecurrent markets for ABC stock and XYZ stock, and satisfy market uptickrequirements (for short sales), and provide a spread that is equal tothe spread level calculated above. For example, with the inside marketfor ABC stock at 70.00-70.25 and the inside market for XYZ stock at124.00-124.15, a cross price of 70.11 for ABC stock and 124.096 for XYZstock provides the spread of 1.2452 thereby meeting the requirement ofboth Arb's and Antiarb's trade request. Finally, in Step 304, paircrossing network 5 crosses 30,000 shares of ABC stock at $70.11 (withArb buying and Antiarb selling) and 17,200 shares of XYZ at $124.096(with Arb selling and Antiarb buying).

If it is determined in Step 302 that the mean of Arb's and Antiarb'sspread order limits does not fall within the range of the market spread,then in Step 305, the spread closest to the mean of the two spreadlimits that is also within the market spread is calculated. For example,if the market spread is $1.3863-$1.28, then the mean of the two spreadlimits ($1.245) is not within the market spread. In such a case, $1.28is selected as the spread level that is closest to the mean and withinthe market spread. In an exemplary embodiment, the spread level at whichArb and Antiarb cross can be determined in any other suitable manner aslong as the spread level is within the market spread and within therange of spread limits indicated in the pair trade requests.

Once the spread level is determined, the method proceeds to Step 303 inwhich pair crossing network 5 calculates prices to cross at that arewithin the current markets for ABC stock and XYZ stock and that meet thecalculated spread level. In the case where the calculated spread levelis $1.28, the cross will occur at a price of $70.08 for ABC stock and$124.1043 for XYZ stock. Finally, the method proceeds to Step 304 inwhich pair crossing network 5 performs the cross between Arb andAntiarb.

Once a pair trade request is filled (or partially filled), thetransaction details are reported to portfolio manager 9 and madeavailable to the client operating client access device 7.

In the previous example, pair crossing network 5 crosses orders in whichboth Arb and Antiarb desire to trade the same pair of securities in thesame ratio. In an exemplary embodiment, pair crossing network 5 executesa cross between two pair trade requests that are not perfectly matched.

For example, assume that pair crossing network 5 receives the pair traderequests as shown in Table 4. Note that these two pair trade requestsare imperfectly matched because each trade request uses a differentratio between ABC and XYZ stock.

TABLE 4 Spread Investor Action Ticker Ratio Shares Action 2 Ticker RatioShares Limit* Arb Buy ABC 1 50,000 Sell XYZ 0.575 28,800 1.19 creditAntiarb Sell ABC 1 30,000 Buy XYZ 0.6 18,000 4.40 debit *Arb's SpreadLimit is defined by [0.575 XYZ − ABC]. Antiarb's Spread Limit is definedby [0.6 XYZ − ABC].Also, assume the market in ABC and XYZ stocks at the time the pair traderequests are received by pair crossing network 5 is as described inTable 5 below.

TABLE 5 Ratio Bid Size Bid Price Ask Price Ask Size ABC: 1 5,000 7070.25 3,500 XYZ: 0.575 6,500 124 124.15 3,000 Arb's XYZ Ratio-AdjustedValue 71.30 71.3863 Arb's Dollar Range Bid:Ask −1.3863 Ask:Bid −1.05AntiArb's XYZ Ratio-Adjusted Value 74.40 74.49 AntiArb's Dollar RangeBid:Ask −4.49 Ask:Bid −4.15

Referring now to FIG. 4, there is shown a flowchart illustrating aprocess by which pair crossing network 5 fills these imperfectly matchedorder. First, in Step 401, pair crossing network 5 determines whetherArb's buy security equals Antiarb's sell security and whether Arb's sellsecurity equals Antiarb's buy security. If both conditions are not met,then a cross between the two orders cannot occur. If the two conditionsare met, then in Step 402 it is determined whether Arb's buy ratioequals Antiarb's sell ratio and whether Arb's sell ratio equalsAntiarb's buy ratio. If these ratios are the same, then pair crossingnetwork 5 proceeds to cross the two orders as described in the exampleabove. Note that for a cross to occur at this stage does not require theratios themselves to match but rather that the ratios of the ratiosmatch (for e.g., a ratio of 2:3 matches a ratio of 0.667:1).

If, however, the two ratios are not equal (as in this case where Arb'ssell ratio does not equal Antiarb's buy ratio), then in Step 403 paircrossing network determines whether there is an overlap between Arb'sand Antiarb's spread limit that also falls within the bid/ask market forABC and XYZ stock. To make such a determination, pair crossing network 5calculates whether there are market prices for both ABC and XYZ stockthat satisfy the following inequalities:

L1<(RatioA*ABC)−(RatioB*XYZ) and  (1)

L2>(RatioC*ABC)−(RatioD*XYZ)  (2)

Where L1 is Arb's spread limit of $1.19 credit, L2 is Antiarb's spreadlimit of $4.40 debit, RatioA is Arb's buy ratio of 1:1, RatioB is Arb'ssell ratio of 1:0.575, RatioC is Antiarb's sell ratio of 1:1 and RatioDis Antiarb's buy ratio of 1:0.6.

Referring now to FIG. 5, there is shown a graph 51 that depicts marketprices for ABC and XYZ stock that meet the spread limits of Arb andAntiarb. In graph 51, the x-axis represents the prices for XYZ stockwhile the y-axis represents the prices for ABC stock. Graph 51 includesa shaded area 53 that is the universe of market prices for ABC and XYZstock that could satisfy the spread trade involving those stocks. Alsoincluded in graph 53 is a spread limit line L1 (inequality (1), above)that represents the spread limit associated with Arb and a spread limitline L2 (inequality (2), above) that represents the spread limitassociated with Antiarb. Thus, the solution set of market prices thatsatisfies inequalities (1) and (2) is the portion of dark shared area 53that falls between spread limit line L1 and spread limit line L2. Inthis example, a cross at a share price for ABC of $70.14 and a shareprice of $124.15 for XYZ stock meets the investor's spread limits andfalls within the market prices for ABC and XYZ stock.

If it is determined that no share prices for both ABC and XYZ stocksatisfy Arb's and Antiarb's spread limits, then no cross can occur. Ifsuch share prices do exist, then in Step 404, it is determined which ofthe investors desires to transact in fewer shares of ABC stock and amismatch in share amounts caused by the differing ratios is determined.In our example, Antiarb desires to sell fewer ABC shares than Arbdesires to buy (30,000 vs. 50,000). Then, in Step 405, pair crossingnetwork 5 determines the number of XYZ shares that can be crossedbetween Arb and Antiarb based on the maximum amount of ABC shares thatcan be crossed (30,000 in this example). Based on the Antiarb ABC orderquantity of 30,000 shares, the maximum number of XYZ shares that Arbwill cross with Antiarb is:

30, 000 * Arb  XYZ  Ratio/Arb  ABC  Ratio = 30, 000 * 0.575/1 = 17, 300(17, 250  rounded  to  an  even  lotsize).

While the maximum quantity of XYZ shares that Arb will cross is 17,300,Antiarb's trade request indicates a desire to cross 18,000 shares. Toovercome this imbalance, in Step 406, pair crossing network 5 is incommunications with external markets 13 for determining whether theexcess 700 XYZ shares needed to satisfy Antiarb's trade request can betransacted for in external markets 13. In an exemplary embodiment, paircrossing network 5 makes this determination by issuing a query to pairtrading engine 3 as to whether 700 shares of XYZ stock can be bought inexternal markets 13. Because, as indicated in Table 5, 3,000 shares ofXYZ stock are offered at $124.15, pair trading engine 3 responds to paircrossing network 5 that the 700 shares needed to balance the crossbetween Arb and Antiarb are available from external markets 13 at$124.15.

Next, in Step 407, pair crossing network calculates the cross pricesthat are necessary such that Arb and Antiarb achieve their respectivespread limits while also incorporating the excess 700 shares of XYZstock that must be purchased from external markets 13 at $124.15 tosatisfy Antiarb's trade request. An example of such cross prices thatmeet these criteria is a price of $70.14 for ABC stock and a price of$124.15 for XYZ stock.

Once the cross prices are calculated, in Step 408, pair crossing network5 crosses 30,000 shares of ABC stock and 17,300 shares of XYZ stockbetween Arb and Antiarb and also buys 700 shares of XYZ stock at $124.15in external markets 13 on behalf of Antiarb. Thus, both Arb andAntiarb's pair trade requests are satisfied.

Alternatively, the entire 18,000 shares of XYZ stock may be crossedthereby fully satisfying Antiarb's trade request. In such a case, theratio mismatch is addressed by Arb purchasing an additional 1200(700/0.575 rounded to a lotsize) shares of ABC stock from externalmarket 13 or from firm inventory 11.

Once the trade is completed, the details of the transaction are providedto portfolio manager 9 to report the transaction details to theinvestors.

In an exemplary embodiment, a pair order (or portion thereof) may befilled against an internal inventory 11 of trade requests maintained bythe financial institution operating system 1. For example, in theprevious example in which an excess of 700 shares of XYZ stock needs tobe purchased in order for a match (i.e., cross) between Arb andAntiarb's trade requests to occur, instead of determining whether the700 shares are available in external markets 3, pair crossing network 5examines firm inventory 11 to determine whether the shares are availableat the required price. Likewise, in cases where pair trading engine 3desires to execute a pair trade based on orders to be sent to externalmarkets 13, pair trading engine 3 may first determine whether the ordercan be filled, in whole or in part, using trade requests pending in firminventory 11. Generally, the advantages of filling an order usingpending trade requests in firm inventory 11 is that execution is faster,transaction costs are lower and leg risk is minimized.

In another exemplary embodiment, a client's pair trade request may alsoinclude a minimum number of spreads that can be traded in pair crossingnetwork 5. Also, pair crossing network 5 may be designed to require aminimum share amount for a cross to occur. A minimum number of spreadsthat can be traded may be provided in order to reduce the distractionsand booking costs associated with numerous smaller trades that mayexceed the benefits of a de minimis fill.

In another exemplary embodiment, portfolio manager 9 publishes the“inside cross market” for any pair that a client has selected forcrossing in pair crossing network 5. In still another exemplaryembodiment, the client has the option for each pair trade selected forcrossing in pair crossing network 5 to designate that the order shouldbe reflected in the published inside cross market. This inside crossmarket consists of the tightest spread bid and offer (and correspondingbid size and offer size) from all client pair orders pending in paircrossing network 5. In this way, a client can assess the likelihood andtiming of a pair trade request being filled by pair crossing network 5.Also, by publishing the client's spread interest, others seekingliquidity can trade at the client's level.

In an exemplary embodiment, the client can designate each pair orderdesignated for pair trading engine 3 and/or pair crossing network 5 for“Broker Negotiation.” If “Broker Negotiation” is designated, theclient's broker-dealer sales representative is notified of the client'sspread order thereby prompting the broker-dealer to solicit acomplementary, agency order from another client. The client may alsodesignate each pair order for “Broker Facilitation” in which case theclient allows the broker-dealer to act principally to fill the client'sorder.

In summary, the advantages to a client of using pair trading engine 3 isthat pair trading engine 3 allows the client to trade a spread orderwhile limiting leg risk or the risk of missing a targeted spread level.This is accomplished by breaking the total order into tranches of sizesproportionate to the market, subject to user minimums and maximums, thatcan be traded in external markets 13 or against firm inventory 11.Orders executed via pair trading engine 3, however, are typically of alower traded volume because trading is constrained to the liquidityavailable in the market. In contrast, trades executed via pair crossingnetwork 5 are not constrained by market liquidity and do not have to betranched to minimize leg risk. In particular, the benefits of filling apair trade request via pair crossing network 5 are as follows:

-   -   Elimination of Leg Risk. Pair crossing network 5 potentially        provides a deeper well of liquidity because the trades are        brokered, as a spread, directly between spread investors via a        central clearing facility. Moreover, the introduction and use of        a pair trading facility eliminates the ‘leg’ risk described        above without a sacrifice of liquidity.    -   Large Transactions Only. Certain large investors may prefer to        use pair crossing network 5 rather than pair trading engine 3 to        avoid having a trade request broken up into numerous small        executions. For example, sudden, brief moves in one of the two        stocks included in the pair trade request may cause pair trading        engine 3 to issue numerous small executions to fill the request.        While a small investor may welcome capturing these small        opportunities, a large investor may find such small executions        to be more of a nuisance than a service.    -   Price Setting versus Price Taking. Large investors seeking        liquidity may prefer to ‘set’ their price via the pair crossing        network 5. Also, other spread investors looking for liquidity        can use pair crossing network 5 to monitor and trade with the        large investor at the large investor's level. While client        orders directed to pair trading engine 3 can designate a spread        limit, such orders are essentially “price-takers”—as the market        reaches the desired level, the orders are executed. Moreover,        the pair trading engine tranching mechanism creates relatively        small orders, allowing institutional flows to move the        individual stocks. As a result, the small, tranched orders        generated by pair trading engine 3 can become ‘overpowered’ by        single-name institutional flows. In addition, orders designated        solely for pair trading engine 3, and not for pair crossing        network 5, are not published to a central quote facility (such        as by portfolio manager 9) thereby preventing other spread        traders from knowing the size and limit of a pair trading engine        order.    -   Illiquid Stocks vs Liquid Stocks. Spreads that include one or        two illiquid stocks are difficult to fill using pair trading        engine 3 alone. Because illiquid stocks often demonstrate small        bid and ask sizes and wide bid-ask spreads, pair trading engine        3 will typically only issue market orders having small        quantities (subject to user minimums and maximums) that presents        the client with greater leg risk from mid-trade changes in the        bid-ask prices. In contrast, orders routed to price crossing        network 5 are not confined by liquidity in the market place        thereby allowing large crosses between spread traders in        illiquid spreads.

Accordingly, a system and method for trading pair securities is providedin which the client receives the benefits of having a pair order filledby either pair trading engine 3, pair crossing network 5 or acombination of both.

A number of embodiments of the present invention have been described.Nevertheless, it will be understood that various modifications may bemade without departing from the spirit and scope of the invention. Basedon the above description, it will be obvious to one of ordinary skill toimplement the system and methods of the present invention in one or morecomputer programs that are executable on a programmable system includingat least one programmable processor coupled to receive data andinstructions from, and to transmit data and instructions to, a datastorage system, at least one input device, and at least one outputdevice. Each computer program may be implemented in a high-levelprocedural or object-oriented programming language, or in assembly ormachine language if desired; and in any case, the language may be acompiled or interpreted language. Suitable processors include, by way ofexample, both general and special purpose microprocessors. Furthermore,alternate embodiments of the invention that implement the system inhardware, firmware or a combination of both hardware and software, aswell as distributing modules and/or data in a different fashion will beapparent to those skilled in the art and are also within the scope ofthe invention. In addition, it will be obvious to one of ordinary skillto use a conventional database management system such as, by way ofnon-limiting example, Sybase, Oracle and DB2, as a platform forimplementing the present invention. Also, network access devices cancomprise a personal computer executing an operating system such asMicrosoft Windows™, Unix™, or Apple Mac OS™, as well as softwareapplications, such as a JAVA program or a web browser. Access devicescan also be a terminal device, a palm-type computer, mobile WEB accessdevice or other device that can adhere to a point-to-point or networkcommunication protocol such as the Internet protocol. Computers andnetwork access devices can include a processor, RAM and/or ROM memory, adisplay capability, an input device and hard disk or other relativelypermanent storage. Accordingly, other embodiments are within the scopeof the following claims.

It will thus be seen that the objects set forth above, among those madeapparent from the preceding description, are efficiently attained and,since certain changes may be made in carrying out the above process, ina described product, and in the construction set forth without departingfrom the spirit and scope of the invention, it is intended that allmatter contained in the above description shown in the accompanyingdrawing shall be interpreted as illustrative and not in a limitingsense.

It is also to be understood that the following claims are intended tocover all of the generic and specific features of the invention hereindescribed, and all statements of the scope of the invention, which, as amatter of language, might be said to fall therebetween.

1. A computer-implemented method for fulfilling a pair trade request,said pair trade request performed by a financial institution having anorder inventory, the method comprising the steps of: receiving aplurality of pair trade requests, comprising at least one pair traderequest, wherein said pair trade request comprises a request to trade afirst security, a request to trade a second security, and a request totrade said first security and said second security with a minimum spreadlimit, and wherein said first security and said second security eachhave a bid price and an ask price; determining the bid/bid spread in themarket of said first security and said second security; determining theask/ask spread in the market of said first security and said secondsecurity; determining that the minimum spread limit of said pair traderequest is met by a range of said bid/bid spread and said ask/askspread; executing a transaction between a first portion of the trade ofsaid first security in said one pair trade request and at least onenon-pair trade request in an external market, provided that the minimumspread limit of said one pair trade request is met by said range of saidbid/bid spread and said ask/ask spread; and executing a transactionbetween one of a second portion of said trade of said first security insaid one pair trade request or a first portion of the trade of saidsecond security in said one pair trade request, and at least onenon-pair trade request in said order inventory, provided that theminimum spread limit of said one pair trade request is met by said rangeof said bid/bid spread and said ask/ask spread; wherein at least one ofsaid steps is implemented with a computer.
 2. The method of claim 1,further comprising: executing a transaction between a portion of thetrade of said second security in said one pair trade request and atleast another non-pair trade request, provided that the minimum spreadlimit of said one pair trade request is met by said range of saidbid/bid spread and said ask/ask spread, and wherein the steps ofexecuting said first portion of the trade of said first security in saidone pair trade request and executing said portion of the trade of saidsecond security in said one pair trade request include the steps of:determining whether the bid price of the first security and the bidprice of the second security meet a spread limit; determining an amountof the second security that can be sold based on a bid size associatedwith the second security; calculating an equivalent amount of said firstsecurity that can be bought based on the amount of said second securitythat can be sold; adjusting said equivalent amount of said firstsecurity based on adjustment criteria; calculating a purchase price forsaid adjusted equivalent amount of said first security based on thespread limit; executing an initiating order to buy said adjustedequivalent amount of said first security at said purchase price; andexecuting a covering order to sell said amount of the second security.3. The method of claim 2, wherein the step of executing a covering orderto sell includes the step of: executing a covering order to sell saidamount of the second security at the bid price of the second security.4. The method of claim 2, further comprising the steps of: determiningwhether the ask price of the first security and the ask price of thesecond security meet a spread limit; determining an amount of the firstsecurity that can be bought based on an offer size associated with thefirst security; calculating an equivalent amount of said second securitythat can be sold based on the amount of the second security that can bebought; adjusting said equivalent amount of said second security basedon adjustment criteria; calculating a selling price for said adjustedequivalent amount of said second security based on the spread limit;executing an initiating order to sell said adjusted equivalent amount ofsaid second security at said selling price; and executing a coveringorder to purchase said amount of the first security.
 5. The method ofclaim 4, wherein the step of executing a covering order to purchaseincludes the step of: executing a covering order to purchase said amountof the first security at the ask price of the first security.
 6. Themethod of claim 4, wherein said adjustment criteria include a minimumamount and a maximum amount.
 7. The method of claim 4, wherein the stepof executing an initiating order includes the step of: rounding saidinitiating order to a round lot size.
 8. The method of claim 1, furthercomprising: executing a transaction between a portion of the trade ofsaid second security in said one pair trade request and at least anothernon-pair trade request, provided that the minimum spread limit of saidone pair trade request is met by said range of said bid/bid spread andsaid ask/ask spread, and wherein the steps of executing said firstportion of the trade of said first security in said one pair traderequest and executing said portion of the trade of said second securityin said one pair trade request includes the steps of: determiningwhether the ask price of the first security and the ask price of thesecond security meet a spread limit; determining an amount of the secondsecurity that can be bought based on an ask size associated with thesecond security; calculating an equivalent amount of said first securitythat can be sold based on the amount of the second security that can bebought; adjusting said equivalent amount of said first security based onadjustment criteria; calculating a selling price for said adjustedequivalent amount of said first security based on the spread limit;executing an initiating order to sell said adjusted equivalent amount ofsaid first security at said selling price; and executing a coveringorder to purchase said amount of said second security.
 9. The method ofclaim 1, wherein at least one of the executing steps include the stepof: executing at least a portion of the trade of said first security orsaid second security in said one pair trade request in a plurality oftranches.
 10. The method of claim 1, wherein said plurality of pairtrade requests comprises another pair trade request, wherein saidanother pair trade request comprises a request to trade said firstsecurity, a request to trade said second security and wherein said onepair trade request has a first spread limit and said another pair traderequest has a second spread limit and wherein said method furthercomprises the steps of: determining that the minimum spread limit ofsaid another pair trade request is met by said range of said bid/bidspread and said ask/ask spread; and matching another portion of saidtrade of said first security in said one pair trade request and at leastanother portion of said trade of said second security in said one pairtrade request against said another pair trade request, provided that arange of the minimum spread limit of said one pair trade request andsaid another pair trade request overlaps with said range of said bid/bidspread and said ask/ask spread.
 11. The method of claim 10, wherein saidmatching step further includes the steps of: determining that a range ofsaid first spread limit and said second spread limit overlaps with amarket spread; setting a spread level; calculating prices for the firstsecurity and the second security that are within the market spread andbased on said spread level; and matching said another portion of saidtrade of said first security in said one pair trade request and at leastsaid another portion of the trade of said second security in said onepair trade request against said another pair trade request based on saidcalculated prices.
 12. The method of claim 11, wherein the step ofsetting a spread level includes the steps of: calculating a mean betweensaid first spread limit and said second spread limit; and setting saidspread level as said mean if said mean is within said market spread. 13.The method of claim 12, further including the step of: identifying aspread amount that is closest to said mean and within said marketspread; and setting said spread level as said spread amount if said meanis not within said market spread.
 14. A computer-implemented method forfulfilling a pair trade request, comprising the steps of: receiving aplurality of pair trade requests, comprising at least one pair traderequest, wherein said pair trade request comprises a request to trade afirst security, a request to trade a second security, and a request totrade said first security and said second security with a minimum spreadlimit, and wherein said first security and said second security eachhave a bid price and an ask price; determining the bid/bid spread in themarket of said first security and said second security; determining theask/ask spread in the market of said first security and said secondsecurity; determining that the minimum spread limit of said pair traderequest is met by a range of said bid/bid spread and said ask/askspread; executing a transaction between a first portion of the trade ofsaid first security in said one pair trade request and at least a firstnon-pair trade request, provided that the minimum spread limit of saidone pair trade request is met by said range of said bid/bid spread andsaid ask/ask spread; executing a transaction between a first portion ofthe trade of said second security in said one pair trade request and atleast a second non-pair trade request, provided that the minimum spreadlimit of said one pair trade request is met by said range of saidbid/bid spread and said ask/ask spread; and repeating the executingsteps until the pair trade request is fulfilled; wherein at least one ofsaid steps is implemented with a computer.
 15. The method of claim 14,wherein at least one of the repeated steps includes the step of:executing a transaction for a portion of the trade of said firstsecurity in said one pair trade request in an external market.
 16. Themethod of claim 14, wherein at least one of the repeated executing stepsis performed by a financial institution having an order inventory and atleast said one of said repeated steps includes the step of: executing atransaction for a portion of the trade of said first security in saidone pair trade request against said order inventory.
 17. The method ofclaim 14, wherein said plurality of pair trade requests comprisesanother pair trade request, wherein said another pair trade requestcomprises a request to trade said first security, a request to tradesaid second security and a request said first security and said secondsecurity with a second minimum spread limit, the method furthercomprising the steps of: determining that the minimum spread limit ofsaid another pair trade request is met by said range of said bid/bidspread and said ask/ask spread; and matching a second portion of saidtrade of said first security in said one pair trade request and at leasta first portion of the trade of said second security in said one pairtrade request against said another pair trade request, provided that arange of the minimum spread limit of said one pair trade request andsaid another pair trade request overlaps with said range of said bid/bidspread and said ask/ask spread.
 18. A computer readable storage mediumstoring instructions for fulfilling a pair trade request that, whenexecuted by a computer, cause the computer to: receive a plurality ofpair trade requests, comprising at least one pair trade request, whereinsaid pair trade request comprises a request to trade a first security, arequest to trade a second security, and a request to trade said firstsecurity and said second security with a minimum spread limit, andwherein said first security and said second security each have a bidprice and an ask price; determine the bid/bid spread in the market ofsaid first security and said second security; determine the ask/askspread in the market of said first security and said second security;determine that the minimum spread limit of said pair trade request ismet by a range of said bid/bid spread and said ask/ask spread; execute atransaction between a first portion of the trade of said first securityin said one pair trade request and at least one non-pair trade requestin an external market, provided that the minimum spread limit of saidone pair trade request is met by said range of said bid/bid spread andsaid ask/ask spread; and execute a transaction between one of a secondportion of said trade of said first security in said one pair traderequest or a first portion of the trade of said second security in saidone pair trade request, and at least one non-pair trade request in saidorder inventory, provided that the minimum spread limit of said one pairtrade request is met by said range of said bid/bid spread and saidask/ask spread.
 19. A computer readable storage medium storinginstructions for fulfilling a pair trade request that, when executed bya computer, cause the computer to: receive a plurality of pair traderequests, comprising at least one pair trade request, wherein said pairtrade request comprises a request to trade a first security, a requestto trade a second security, and a request to trade said first securityand said second security with a minimum spread limit, and wherein saidfirst security and said second security each have a bid price and an askprice; determine the bid/bid spread in the market of said first securityand said second security; determine the ask/ask spread in the market ofsaid first security and said second security; determine that the minimumspread limit of said pair trade request is met by a range of saidbid/bid spread and said ask/ask spread; execute a transaction between afirst portion of the trade of said first security in said one pair traderequest and at least a first non-pair trade request, provided that theminimum spread limit of said one pair trade request is met by said rangeof said bid/bid spread and said ask/ask spread; execute a transactionbetween a first portion of the trade of said second security in said onepair trade request and at least a second non-pair trade request,provided that the minimum spread limit of said one pair trade request ismet by said range of said bid/bid spread and said ask/ask spread; andrepeat the executing steps until the pair trade request is fulfilled.20. The method of claim 19, wherein at least one non-pair trade requestis selected from the group consisting of: an external market order andan order from an inventory from a financial institution.